COMMISSIONER OF INCOME TAX Vs. HUKUMCHAND MILLS LIMITED

JUDGEMENT

(1.) THE question referred to us in this reference under section 256(1) of the Income -tax Act, 1961, is as follows :

(2.) THE facts : Hukumchand Mills Ltd., the assessee, is a company incorporated in the year 1915 under the Companies Act in force in the then Holkar State of Indore (referred to hereinafter as 'the Holkar State') as a public limited company having its registered office at Indore. The principal object of the company was the manufacture and sale of cloth. The assessee owns a textile mill at Indore. Up to the accounting period relevant to the assessment year 1949 -50, the assessee was being assessed in British India as a non -resident, except in 1948 -49 when it was assessed as a resident. The assessee became liable to be assessed as a resident from the assessment year 1950 -51. One of the questions which arose in respect of the assessment of the assessee for the years following the assessment year 1950 -51 was in respect of the determination in the assessment of the proper written down value of the buildings, machinery, etc., of the assessee for calculating the depreciation allowance under section 10(2)(vi) of the Indian Income -tax Act, 1922 (referred to hereinafter as 'the Act of 1922'). The assessee relied upon section 10(5)(b) of the Act of 1922 and contended that the original cost of the machinery, etc., should be taken into account for calculation of depreciation in the first assessment year in which the assessee was regularly assessed as a resident in India, namely, 1950 -51, and depreciation should be calculated on that footing for that assessment year with appropriate adjustments in the succeeding assessment years. It was contended by the assessee that as the assessee had not been allowed any depreciation under the Act of 1922, it was the original cost of machinery, etc., which had to be taken as basis for allowing depreciation without taking into consideration the number of years during which the machinery had been working, the depreciation it had suffered or the written down value entered in the books. The Revenue contended that the said depreciation in the earlier years should be taken into account and the written down value arrived at. The Income -tax Officer concerned came to the conclusion that such depreciation as was allowed under the Industrial Tax Rules in force in the Holkar State would have to be deducted, the written down value of the machinery arrived at after such deduction and depreciation under the Act of 1922 ought to be calculated on the footing of such written down value. The assessee appealed to the Appellate Assistant Commissioner who took the view that since the Industrial Tax Rules relied upon by the Revenue did not relate to income -tax, super -tax or any other law relating to tax on profits of business and as no double taxation relief had been allowed in respect of the same, the contention of the assessee must be upheld. The Revenue appealed to the Income -tax Appellate Tribunal which dismissed the appeal and upheld the view of the Appellate Assistant Commissioner. The Tribunal has pointed out that the background relating to the enactment of the Industrial Tax Rules is that prior to May 1, 1926, a cotton excise duty was in force in the Holkar State. That duty was an indirect tax on the production of cloth by various cloth mills. There was no tax on income as such levied in that State at all. There were representations by various cloth mills that the excise duty levied as aforesaid caused considerable hardship and it was with a view to obviate such hardship that from May 1, 1926, the levy of excise duty on cotton cloth was abolished and in replacement of that levy, the Industrial Tax Rules came into force. In this regard, we find that a notification was issued on May 3, 1926, and published on May 10, 1926, setting out that the then Government of the Holkar State was pleased to order :

(3.) THE said Notification was published in the Gazette of November 29, 1926. By a notification dated December 6, 1927, it was notified that the Cabinet had approved of certain revised rules for recovery of industrial tax levied on cotton mills. The said Industrial Tax Rules, 1927, were framed and enforced under the aforesaid notifications. In the opening portion of the said Rules, it is stated that the said Rules have been framed for the levy of 'the tax' and for the ascertainment and determination of the income of the cotton mills for the said purpose. It was directed that these Rules would have retrospective effect from May 1, 1926. Rule 1 provides that the industrial tax shall be payable once a year on the basis of the income, profits and gains of the said period. Rule 3(1) provides that the industrial tax shall be payable by an assessee in respect of the profits or gains of any cotton mills industry carried on by him in the Holkar State. Rule 3(2) provides for allowances to be given in the computation of the profits and gains. Suffice it to say that all the allowances or deductions provided are in respect of expenses incurred in connection with the industry of cotton textile mills manufacturing cloth. Rule 6 provides that the industrial tax shall be levied on all cotton mills in the Holkar State at the rates specified therein. These rates are the same as set out in the Notification dated May 3, 1926, referred to above. Rule 8 provides for the form in which the return of income under the Rules should be submitted. The industrial tax being a tax calculated with reference to profits and gains, the form of the return does bear similarity to returns in respect of taxes on income. The only other feature of the form to be noted is that in the amounts to be added back out of the amounts debited in the books of account of an assessee is an item, namely, item No. 5, which runs as follows : '5. Income -tax or super -tax or industrial tax.'